If you own apartments, get out while you still can

Opinion: Industry expert says sell, sell, sell

Larry JacobsonThe Province

Over my lengthy 45-year career as a financial advisor, I have been a strong advocate of owning apartment buildings.

But now, as much as it pains me, I am recommending to clients not to further buy any residential revenue properties in the Greater Vancouver area. More importantly though, I am also recommending to them to consider putting their apartment holdings on the market to take advantage of this over-heated, over-bought, apartment feeding frenzy that we are currently experiencing.

This decision did not come lightly, nor did I wake up one morning and decide to sell. Many of my colleagues were, to say the least, shocked that I, as a financial advisor and experienced real estate professional, would have come to this conclusion. My detailed research and the current geopolitical climate made it obvious to me that the values associated for apartment buildings just do not make any economic sense. To quote Judge Judy: “If it doesn’t make sense, it cannot be true.”

Is there a bubble about to burst? No. Is this a crisis similar to the U.S. sub-prime fiasco? No! Then where did my epiphany come from?

Many of you who own apartments believe this market will continue to go on for many more years – and you may very well be right – but this is where I see the issue: When you decide to sell and “cash in,” there may be no bids – they might just disappear — and this could happen overnight. There will always be buyers out there, but only scavengers taking advantage of fear.

In my view, it is not a matter of if, it is only a matter of when. It has happened in the past and it will happen in the future. History repeats!

The rewards that you have experienced have been amazing, but, as my father once said, “Never argue or complain about a gain, even if you have to pay the tax, and leave something on the table for the next buyer or there won’t be a ‘next buyer’.”

Here are my specific reasons why the market will change:

Vancouver and many of the close suburbs have become, or will become, a home to either wealthy immigrants or older retired or semi-retired professionals who have owned their homes for many years. This is evident by schools, especially on Vancouver’s west side, losing students. The VSB is experiencing large budget shortfalls because of declining enrolment. When there are no children entering the elementary school system, this means there are no young families. Demand starts at the bottom, not the top.

Lifestyle choices: People balance their work life and family life with more weighting toward family life. People are just not going to put up with these long commutes from the eastern valley to get a job in Vancouver. Young professionals are moving out of Vancouver to other parts of western Canada, even to Toronto where even there housing is far more affordable than in Vancouver. Think about it: Would you pay rent of $3,000 a month for a two-bedroom condo or $7,500 a month for a four-bedroom home? No, of course not.

Young people want home ownership – not a 900-square-foot two-bedroom condo that consumes half their paycheques just to make the monthly mortgage payment.

Jobs will disappear. Companies will relocate where the young employees have access to more affordable housing — and $4.00 per square foot per month is not affordable rent!

As demand for $2,200 per month one-bedrooms fall, what happens to the value of your apartment?

Economics – it is always the economics: Why anyone would buy an apartment building at say 2.5 per cent to 4 per cent Cap (after renovations and market rents are achieved), especially with rising interest rates almost a sure bet. Where is the upside? There are so many other vehicles that produce better returns, equally advantageous tax treatment, and better liquidity – without worrying about the toilet overflowing or bed bugs.

Financing is becoming much more difficult: lenders want more equity, better covenants and are demanding terms and conditions.

If government can pass the 15% foreign buyers tax (which certainly impacts demand), what else can they pass? Trust me, you won’t like it. Nothing good happens to entrepreneurs when government starts to mess with a business they know nothing about.

Having said all that, if you own a rental property, sell. List your assets sooner than later.

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on Wednesday, December 28th, 2016 at 11:20 am and is filed under Real Estate Related.
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